Can the Colombian economy be dollarized?

At a time when the price of the dollar is noticing unprecedented numbers in Colombia, where today 4513.28 dollars are paid each one, a frequent conversation appears in this type of situation, namely, that which indicates the appropriateness of dollarization or not to the Colombian economy, that is, the elimination of the peso and the adoption of US currency as the official currency.

With total dollarization, the US currency will be a legal and obligatory bid, it will become the means of payment and the unit of account, that is, the prices of products and services will be related to this category.

Thus, the peso as we know it today disappears, salaries are received in American currency, and these will be the bills and coins that will be transported to stores and warehouses. In financial terms, the assets and liabilities of the country will also be defined in terms of that currency.

This occurs in neighboring countries such as the cases of El Salvador (2001), Ecuador (2000) and Panama (1904). In fact, the number of independent countries or territories that are fully dollarized is small and unrepresentative, with Ecuador being the largest in terms of population and gross domestic product (GDP). Palau, Micronesia, the Marshall Islands, and East Timor are also part of that list.

For the Dean of Economics at Eafit, Cesar Tamayo, the issue of dollarization comes up from time to time, whenever noticeable movements in the exchange rate are seen.

“But as long as we maintain an independent central bank, focused on lowering inflation (a tax that affects the poorest), it will be appropriate to maintain our currency and a flexible exchange rate,” the professor said.

That is, in the last month alone, the dollar rose by 15.35% against the Colombian currency, from $3,912.51 to $4,513.28, an increase of $600.77.

strong voices

While the price of the North American currency starts this morning at a record value, President Ivan Duque called for signals that remove uncertainty from the country.

According to the president, “when there are messages that generate uncertainty about long-term investment or as to what might lie ahead in rural investment regimes, those are the things that generate this situation (dollar appreciation),” Duque said. In front of reporters, at the 2022 National Senior Management Award Ceremony.

He admitted that this was not the only country where the dollar was overvalued, and noted how Chile faced a similar situation, but he insisted on the urgency of certainty regarding the long-term legal stability of the dollar. investment.

In response to Duque’s remarks, President-elect Gustavo Petrou wrote on his Twitter account: “To those who buy dollars in Colombia today, with great respect, I must announce that when they put them up for sale again, they will be worth less.” At that moment. eye! Don’t waste your money.”

It should be noted that in the recent economic forecasts of various entities, an increase in the dollar above $4,500 was not considered. In the Treasury’s medium-term fiscal framework economic assumptions, the rate this year is $3,924.

The Bank of the Republic’s monthly economic outlook survey puts $3,837.56 in December, and Fedesarrollo’s Financial Survey of bets at $3,820.

order at home

Liliam Mesa Arango, president of the Abura Sur Chamber of Commerce, does not think Colombia is sufficiently prepared to dollarize its economy at this time.

This is how it is believed, at other times, that the state has shown that it has sufficient capacity to control inflationary phenomena and revaluations, and in this particular case, the factors that push the dollar up today are more closely related to internal factors. External phenomena that affect it.

“In this sense, regardless of the external effects affecting the exchange rate today, such as global inflation or the war in Ukraine, I think the most urgent and priority measure to reduce pressure on it is related to the signals, messages and guidelines that the next government begins to publish,” Mesa said. .

It considers it necessary for President-elect Gustavo Petro to take clearer and more realistic positions in the face of the many uncertainties that citizens are experiencing, in order to “ventilate” the economy and address fears and anxieties. There are investors, businessmen and many other actors who are in “standby mode” in this regard.

In contrast, Maria Claudia Lacouture, director of the Columbia-American Chamber of Commerce, considered it inappropriate to assume that the foreign exchange market is out of control.

“Instability should not feed uncertainty that appears speculative in times of change of direction in the national government, especially if there are indications of a serious and responsible management in the hands of the appointed Minister of Finance, José Antonio Ocampo, a man with sufficient knowledge and experience to deal with the situation” , the former Minister of Commerce commented.

crazy

One very sensitive sector of dollar behavior is the foreign trade sector, where businessmen depend on what happens with that currency to send or receive goods: if it increases in value, as it currently does, it is favorable to those who sell abroad, but not to those who have to Bring in products from abroad.

The president of the National Foreign Trade Association (Analdex), Javier Diaz Molina, asserts that in times like the current era, with the dollar rising, what is emerging is that the eventual dollarization of the national economy will be insane.

Losing control of monetary policy would be absurd. What is happening is a global phenomenon and is faced by different countries in the world. “Colombia is not the most affected, you have to look at the euro, a currency that has been hit hard,” the leader said.

He also explained how Ecuadorean exporters are interested in strengthening the dollar, which makes them less competitive compared to other countries that are devaluing their currencies. In other words, they end up losing out to their competitors and business partners, because Ecuadorean products become very expensive. “This could support an economy like the United States, and yet the American economy is in trouble,” Diaz added.

Tamayo agreed with Diaz and noted that if we had a dollar-based economy in times like these, we would push with less external demand for our products in international markets, and even seriously jeopardize economic dynamics and job creation.

bad treatment

Jaime Andrés Correa, Professor of Economics at the University of Antioquia, emphasized that Colombia has been one of the most stable economies in Latin America over the past 20 years, and, with the exception of drastic measures, the fundamentals of the economy should not suddenly change.

He determined that potential dollarization would immediately lead to an extraordinary increase in inflation higher than is currently occurring due to price adjustments and the phenomenon of wealth loss due to transfer effects would occur.

Proof of this is that the minimum wage of $1 million with the exchange rate six months ago was equivalent to $255.24, but with the level it reached today it has fallen to $227.88, a 10.7% decrease (see chart).

In addition, Correa added, the independence of monetary policy will be lost and therefore the presence of the central bank will not be justified. He warned that “the loss of autonomy will put the country at the expense of international monetary policy.”

In this context, Bancolombia economic analysts have argued that maintaining its own currency has the great benefit of maintaining this discretionary use of monetary policy. This means that the Banco de la República can use the interest rate as a stabilizing factor for the overall economic cycle.

Meanwhile, through dollarization, Colombia will have to deal with the country’s monetary policy decisions made by the Federal Reserve. Naturally, the said entity will direct its decisions based on the needs of the United States at all times, and will not take into account what is happening in Colombia.

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